Japanese stocks and the yen have reached a critical juncture.
In a report released on the 25th, Nomura Securities issued a warning about the future trends of the Japanese stock market and the yen: Japanese stocks may further decline, while the yen, after a long period of depreciation, may appreciate further.
Affected by the decline of US tech stocks and the impact of yen appreciation, Japanese stocks have been falling recently, with the Nikkei 225 index falling to near the 38,000 point level. If it confirms a break below the 38,000 level, it will further decline.
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Even quantitative commodity trading advisors (CTAs) who have been bullish on the Japanese stock market have started to sell Japanese stocks.
<h2>CTAs are reducing their long positions in Japanese stocks and may increase their short positions in USD/JPY</h2>
According to Nomura Securities, CTAs have basically cleared all their long positions accumulated since the last week of June . Their net long positions in Japanese stocks have also dropped from 1 trillion yen a week ago to the current 250 billion yen. CTAs have conducted a large amount of unwinding and stop-loss operations in Japanese stocks during the decline, further exacerbating the selling pressure on Japanese stocks.
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Once the Nikkei 225 index falls below the 38,000 level, CTAs will increase their short positions in the Nikkei 225, expecting to accumulate short positions of about 500 billion yen per week, further intensifying the decline in Japanese stocks.
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As systematic investors, CTAs conduct trend-following trades through algorithms and models, which means they buy when prices rise and sell when prices fall, often leading to a negative feedback loop.
On the other hand, Nomura Securities also pointed out that the weakness in the Japanese stock market may also be related to the recent appreciation of the yen.
Since the beginning of this year, the yen has been continuously depreciating, even prompting multiple interventions by the Bank of Japan. However, since early July, the yen has been steadily rising, with the USD/JPY currently falling to the level of 153.6. Yen appreciation usually has a negative impact on Japanese export companies, which in turn affects the stock market.
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Nomura Securities stated that once the USD/JPY exchange rate falls below 155, CTAs may start to increase their short positions in USD/JPY.
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Even if the exchange rate remains at the current level, we also expect CTAs to accumulate an additional 1 trillion yen in short positions in USD/JPY in the future.
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<h2>Weakness in US stocks dragging down Japanese stocks</h2>
Finally, Nomura Securities also pointed out that the recent weakness in US stocks has also dragged down the Japanese stock market.
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Although US stocks are currently showing a short-term downtrend, investors seem to have not provided enough protection for the decline in tech stocks, which are the main actors in this wave of selling. The skewness of tech stocks (the difference between implied volatility of put options and call options) has slightly increased but still remains at historically low levels
The skewness indicator is a measure of market expectations for the future trend of a particular asset. When the skewness indicator is low, it means that investors may be unwilling to buy put options to hedge risks.
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It is worth noting that there are still a large number of systematic investors holding long positions in the current U.S. stock market. If they choose to unwind their long positions in the future, it may exert downward pressure on the market.
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Although CTAs currently show signs of reducing long positions, they still hold a significant amount of long positions in S&amp;P 500 index futures. If market panic intensifies in the future and the VIX index remains above 15, we expect to see a net sell-off of $40 billion. We believe that it is wise to closely monitor the downside risks of the U.S. and Japanese stock markets
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Nomura Securities pointed out that the Japanese stock market may turn around and start to decline, while the Japanese yen may further appreciate. CTA has recently significantly reduced its long positions in Japanese stocks and may start to increase short positions in the USD/JPY

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